Bernanke Speaks, But What is He Saying?

The big news of the market today is Ben Bernanke. He is speaking this morning at 10 AM at a conference for central bankers in Jackson Hole. The general outlines of what Bernanke will say probably won’t be a surprise. He will probably overview the Fed’s efforts to boost the economy so far. He will say the economy is recovering. And he will probably give a defense of the Fed’s program to buy mortgage and Treasury bonds. But what people are watching for is how many times or at all Bernanke uses some key words and phrases. Here are the words people are looking to see if Bernanke uses:

1)inflation

2)slower than expected (the recovery that is)

3)deflation

4)extended (rates being low that is)

If Bernanke uses the D-word it will be major news and the market will move. But my guess is that you won’t here the D-word today. And instead you will hear a lot of phrase #2. And despite what the gold bugs think, I don’t think there will be any mention of inflation. Here’s why:

In a story earlier this week, the Wall Street Journal reported that there was much more dissent among the governors about whether the Fed should continue with some modest purchases of Treasury bonds, instead of letting that program wind down. The fact that some governors were nervous about continuing those purchases suggested that at least a handful of them were still more worried about inflation, rather than a slowdown in the economy. The lead dissenter was reportedly Thomas Hoenig, who is the president of the Kansas City Fed, and is reportedly nervous about inflation.

But in a speech two weeks ago Hoenig seemed to suggest he was tilting more toward the idea that the economy was recovering slower than expected:

“I agree that the Federal Reserve needs to keep its policy rate accommodative,” and modest rate rises won’t conflict with that, Hoenig said. “For a while longer, it should remain even below the long-run equilibrium rate. However, the economy is improving and is growing at a rate faster than the last two recoveries,” and policy needs to respond.

OK. Hoenig is still pushing for the Fed to raise its short-term interest rate. So you could see Bernanke make his argument for keeping rates low. That means we can expect a few “extended” phrases. But I think Hoenig’s opening the door on signs of the weak recovery paves the way for Bernanke to used “slower than expected” as much as he wants.